Closing Recap

Wednesday, August 24, 2022

Equity Market Recap

·     U.S. stocks rise for the first time in 4-days, posting modest gains ahead of key economic data tomorrow morning (Q2 GDP and jobless claims) and the start of the Jackson Hole Economic Policy Symposium from the Fed. Market strength broad-based with all 11-S&P sectors finishing higher. Sector focus remained on retailers after earnings (URBN, JWN, WOOF) and ahead of results in tech (CRM, NVDA, SNOW, SPLK) tonight. Discretionary stocks saw big moves, along with pockets of strength in MedTech, Financials and select Metals (uranium). Oil prices end higher on nuclear deal comments, Treasury yields hit 8-week highs and the dollar was higher.

·     Overnight, hawkish Fed member (but not voting member) Neil Kashkari said, “the big fear that I have in the back of my mind is, if we are wrong and markets are wrong and that this inflation is much more embedded at a much higher level than we appreciate or markets appreciate, then we are going to have to be more aggressive than I anticipate, probably for longer, to bring inflation back down." Note today, President Joe Biden said the U.S. government will forgive $10,000 in student loans for many debt-saddled college graduates, a move that could fuel inflation.

·     Stock markets have had a nice rebound off June lows, with a more than 15% bounce over that stretch after a dismal 1H (one of the worst in history) on surging inflation impact concerns. However, heading into the Jackson Hole Fed Symposium this week and the September Fed meeting there are several red flags for markets: The Fed is overly “hawkish” on rates after being “dovish” for over a decade (don’t fight the Fed) and markets remain unphased, or don’t believe the Fed will stick with its QT direction. Also, earnings started to slow this quarter, the yield curve remains inverted (2s 3.38% vs. 10-yr 3.12%) which historically marks a signal preceding a recession and inflation prices remain stubbornly high – including energy as prices jump heading into the Fall/Winter (14-year highs natural gas).

Economic Data:

·     July Durable Goods Orders were unchanged vs. +0.6% expected and +2.2% prior (revised from +1.9%). That follows four straight months of increases. Core durable goods rose +0.3% vs. +0.2% expected and +0.3% prior (unchanged) and Durable goods, excluding defense rose +1.2% vs. +0.7% in June (revised from +0.4%). Non-defense orders, excluding aircraft rise +0.4% vs. +0.3% expected and +0.9% prior (revised from +0.5%).

·     July Pending Home Sales fell -1.0% m/m to 89.8 (lowest since April 2020) vs. -4.0% consensus and -8.9% in June (revised from -8.6%). Pending home sales tumbled 19.9% in July on a y/y basis. In July, contracts fell in the Northeast, South and Midwest, but rose in the West. Contracts have declined in eight of the last nine months. Monthly bill on typical home with 20% down payment rose to $1,841 in 2Q, up 50% from year earlier

·     The Jackson Hole Economic Policy Symposium starts tomorrow: It is annually hosted by the Federal Reserve Bank of Kansas City. It brings together central bankers, economists, academics, and financial market participants from around the world, to discuss key policy issues relating to monetary policy and financial regulation.

Commodities

·     Oil prices finish higher, as WTI crude gained $1.15 or 1.23% to settle at $94.89 per barrel while Brent gained $1.00 to settle at $101.22 per barrel. Prices jumped midday on concerns that the United States will not consider additional concessions to Iran in its response to a draft agreement that would restore Tehran’s nuclear deal, and potentially the OPEC member’s crude exports. Iran said it had received a response from the United States to the EU’s "final" text for revival of Tehran’s 2015 nuclear deal with major powers. Both crude oil benchmark contracts touched three-week highs earlier on Wednesday after the Saudi energy minister flagged the possibility of cutting production. Inventory data was mixed; the U.S. Strategic Petroleum Reserve (SPR) crude stocks fell to lowest last week since January 1985.

·     Gold ends little changed, rising 30c to $1,761.50 an ounce a day after snapping its 6-day losing streak as investors prep for key economic data and Fed commentary this week. The U.S. dollar index (DXY) stalled around the 108.4 level, after climbing as high as 109.112 earlier in the session ahead of GDP and jobless claims data tomorrow. The U.S. Treasury 10-yr yield hits 2-month highs of 3.12%, up over 7ps but remains inverted to 2-yr by more than 20-bps. China’s foreign exchange regulator phoned several banks to warn them against aggressively selling the Chinese currency, Reuters reported citing people. The U.S. Treasury sold $45B in 5-year notes at a yield of 3.23% vs. 3.22% when issued prior, with a bid-to-cover at 2.30 vs. 2.46 prior auction and indirect bidders awarded 61.18% and directs 18.22%. Last auction tomorrow with $78B in 7-year notes.

Sector News Breakdown

Consumer

·     Department & Apparel Retailers; JWN shares tumble after slashing full year earnings guidance from $3-$3.50 to new guide of $2.30-$2.60 saying while quarterly results were consistent with previous outlook, customer traffic and demand decelerated significantly beginning in late June; URBN posted in-line quarterly revenue of $1.8B while earnings of $0.65 missed by 4c, while being down 50% y/y and inventories up 44% on only 2% sales growth; FTCH to acquire a 47.5% stake in Richemont’s online fashion retailer YOOX Net-A-Porter; CTRN reported Q2 EPS loss (-$0.310 vs. profit of $1.36 y/y and total sales fell -22% to $185M and expects low single digit increase in second half total sales compared to first half total sales

·     Miscellaneous retailers: WOOF Q2 comp sales rose 3.8% below est. 4.1%, posted weaker-than-expected second-quarter earnings and offered guidance that lagged estimates seeing adj EPS $0.77-$0.81 on sales $5.975B-$6.05B below est. $0.89 and $6.107B; LZB a bright spot in retail after Q1 adj EPS $0.91 topped est. $0.67; Q1 sales rose 15% to $604M vs. est. $566.1M; Q1 retail segment sales increased 30% to $236M, an all-time qtrly record; BBBY advanced as co disclosed it had clinched a loan deal that would help shore up liquidity, according to people familiar with the matter. The Wall Street Journal previously reported that the retailer was seeking about $375 million to pad its cash levels and pay down existing debt; PTON announced the Peloton Bike, Guide, and select accessories and apparel are now available for purchase in Amazon’s U.S. stores

·     Auto sector: TSLA’s 3 for 1 stock split takes effect tomorrow; TSLA, NIO suspend EV charging services as facilities in Chengdu, Chongqing have been taken offline; drought, heatwave gripping China has disrupted power supplies – Bloomberg reported; in auto retail, AAP Q2 results disappointed on the top line but was better than consensus on the bottom line, and it lowered its full-year outlook; Q2 comps of -0.6% were below consensus +2.2%; in EV, FREY and Hana Technology have closed an agreement to jointly develop equipment and automation solutions for FREYR’s customer qualification plant in Norway, as well as for FREYR’s planned gigafactories; ENVX tgt raised to $36 from $19 at Cowen noting the auto oppty looms large as it is still just getting started with early promising fast charge data; GPI said CEO will retire end of year and be replaced by current president of U.S. operations

·     Consumer Staples & Restaurants; EAT shares decline as Q4 comp sales growth of +3.1%, but operating income as a percentage of total revenues plunged to 4.4% from 10.0% y/y citing higher commodity costs, restaurant expenses, and increased restaurant labor costs and op margin dropped to 10.3% from 16.9% last year and adj Q4 EBITDA was $100.2M vs. $144.3M a year ago (guides FY below views); in food/beef space (HRL, TSN, PPC), Reuters reported with almost all of Texas in drought, ranchers are sending ever more cattle off to slaughter, a trend likely to increase beef prices over the long term due to dwindling supply; TTCF rises following news that the plant-based food company expanded its distribution agreement with WMT in the U.S.; BYND price tgt cut to $9 from $12 at Piper and maintains underweight

·     Housing & Building Products; homebuilder TOL Q3 earnings beat was driven by better-than-expected margins, land sales revenue, other income, a lower tax rate – but unit orders decreased -60% yoy vs BTIG street-low estimate of -28% yoy and consensus -22% and its cancellation rate more than quadrupled y/y to 13.0% vs 3.1% in 3Q21; homebuilders however were higher despite mixed TOL results, 8-week highs for Treasury yields and Pending home sales data weakness

Energy

·     Inventory data: American Petroleum Institute showed weekly crude stockpiles fell -5.632MM barrels in the latest week while Cushing with a build of +679K barrels; gasoline inventories rose +268K barrels and distillates rose +1.05MM barrels. Weekly EIA data showed crude inventories fell -3.3M barrels vs. -0.933M consensus and -7.056M last week. EIA Gasoline virtually unchanged from -4.642M last week vs. -1.464M consensus.

·     Stock news: XOM, CVX notable laggards in strong energy space; CDEV upgraded to Buy at Truist as near-term transformational merger places company among best SMID cap E&Ps (the Centennial/Colgate merger is likely less than two weeks out); general broad strength in energy continues on the week with oil, natural gas remains persistently higher

Financials

·     Financial Services; INTU delivered strong FQ4 results, driven by outperformance in QB, and provided FY23 guidance: SBSE guidance at 19-20% Y/Y ahead of consensus of 14% Y/Y and expects the Small Business segment to post 15-20% growth (up from 10-15%); PYCR reported significantly better than expected Q4, with non-GAAP EPS of $0.04 (consensus $0.02) on revenue of $111.0M (consensus $103.5M), up 26% y/y, the third quarter in a row of acceleration

·     FinTech, Payments, and Consumer Finance; in lending, the White House confirmed it will forgive 10k in student debt confirmed, 20k in Pell grants; SOFI 29.95M shares secondary priced at $6.10/share; WEX approves $150M share repurchase program; PAYX Martin Mucci to retire as CEO, remains Chairman; GS is considering limiting a rollout of new checking accounts at Marcus as the digital consumer bank continues to rack up losses, Bloomberg reported; AXP rises after the Reserve Bank of India lifted curbs imposed on AXP last year that had prevented it from taking on new customers in India

Healthcare

·     Biotech, MedTech Equipment; IART discloses that on Aug. 18 it initiated an immediate removal of its CereLink intracranial pressure monitors globally after reports of out-of-range pressure readings; GKOS secured an exclusive global license from iVeena Delivery Systems to develop and commercialize its corneal disorder treatment IVMED-80; ILMN rises around 8% in rebound, snapping its 6-day losing streak, and moving back above its 50-day MA $201.50; MedTech in general saw nice rebound today ALGN, DXCM, TNDM, PODD

Industrials & Materials

·     Industrial & Machinery; for non-resi names (URI, WSC), the American Institute of Architects’ Architecture Billings Index (ABI) was 51.0 in July vs. 53.2 in June. The July result represents an 18^th consecutive month above 50 after a nearly year-long, pandemic-driven, sub-50 lull in 2020; DY reported a top and bottom line beat for Q2, helping E&C and power names early; in the HVAC industry, Cowen said the severity of a C23 unit drop in North American residential HVAC is an investor debate, given its importance to OEM profits (89% at LII; ~30% at CARR; 25% at TT). NA resi HVAC OEM profits are likely to rise in C23 even as volumes drop. They don’t expect volumes to "mean-revert" to the pre-COVID trend line, a shallower drop than feared & an area of resilience vs. other industrial sectors – rate TT, CARR, JCI, and LII Outperform

·     Aerospace & Transports; ZTO announced a proposed offering of $870M in convertible senior notes; in trucking sector (JBHT, CHRW, ODFL), industry data shows trucking spot rates (net of fuel) continue to fall, hitting new cycle lows; down 65% from the start of the year to $1.87/mile; Dow component BA top gainer in the index

·     Metals & Materials; TRQ rises after RIO raises its bid for the company to C$40 per share for approximately 49% of outstanding shares in deal valued around $3.1B (about an 18% premium to prior bid); Uranium stocks CCJ, UUUU, URA advanced early after India’s largest power producer said it is looking to develop another massive nuclear project just weeks after announcing its entry into the sector. Overnight, Japan signaled its return to nuclear power to stabilize energy supply; in fertilizers (NTR, MOS, CF, IPI), the UK announces intention to temporarily halt ammonia production at Billingham complex; company will import ammonia to produce AN fertilizer and nitric acid at site; in chemicals, DOW has temporarily reduced polyethylene operating rates by 15% of global nameplate capacity, the company said Wednesday in a letter to customers; CLF announces price increase for carbon steel products

Technology, Media & Telecom

·     Semiconductors; earnings tonight for NVDA the highlight in semis – roughly 2-weeks after lowering its outlook for the upcoming quarter; IIVI Q4 revenue rose 7% y/y to $887M topping the $858M estimate after earnings topped views and issues higher guidance for Q1 revs of $1.3B-$1.4B vs. est. $1.02B but softer EPS outlook

·     Hardware & Software movers; earnings tonight in software for ADSK, Dow component CRM, and other cloud names SNOW and SPLK; SCSC shares tumble following Q4 profit miss as posted Q4 profit of $0.91 missing estimates by $0.06 while revs rose to $962.29M and beat by $52.44M

·     Components & Services; CYXT was upgraded to Buy from Neutral at Citigroup noting shares based on prospects to sustain mid-single digit core revenue growth for at least the next 18-months; improve funding for development as well as possible acquisitions; and retain positive longer-term strategic optionality.